02919cam a22002897 4500001000700000003000500007005001700012008004100029100002100070245012000091260006600211490004200277500001800319520158900337530006101926538007201987538003602059690013302095690009702228690006702325700002202392700002102414710004202435830007702477856003802554856003702592w15400NBER20180319091948.0180319s2009 mau||||fs|||| 000 0 eng d1 aAcemoglu, Daron.10aPower Fluctuations and Political Economyh[electronic resource] /cDaron Acemoglu, Mikhail Golosov, Aleh Tsyvinski. aCambridge, Mass.bNational Bureau of Economic Researchc2009.1 aNBER working paper seriesvno. w15400 aOctober 2009.3 aWe study the constrained Pareto efficient allocations in a dynamic production economy in which the group that holds political power decides the allocation of resources. We show that Pareto efficient allocations take a quasi-Markovian structure and can be represented recursively as a function of the identity of the group in power and updated Pareto weights. For high discount factors, the economy converges to a first-best allocation in which labor supply decisions are not distorted and the levels of labor supply and consumption are constant over time (though there may be transfers from one group to another). For low discount factors, the economy converges to an invariant stochastic distribution in which distortions do not disappear and labor supply and consumption levels fluctuate over time. The labor supply of groups that are not in power are taxed in order to reduce the deviation payoff of the party in power and thus relax the political economy/sustainability constraints. We also show that the set of sustainable first-best allocations is larger when there is less persistence in the identity of the party in power. This result contradicts a common conjecture that there will be fewer distortions when the political system creates a "stable ruling group". In contrast, political economy distortions are less important when there are frequent changes in power (because this encourages compromise between social groups). Despite this result, it remains true that distortions decrease along sample paths where a particular group remains in power for a longer span of time. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aE61 - Policy Objectives • Policy Designs and Consistency • Policy Coordination2Journal of Economic Literature class. 7aH11 - Structure, Scope, and Performance of Government2Journal of Economic Literature class. 7aP16 - Political Economy2Journal of Economic Literature class.1 aGolosov, Mikhail.1 aTsyvinski, Aleh.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w15400.4 uhttp://www.nber.org/papers/w1540041uhttp://dx.doi.org/10.3386/w15400